Smart Investing: how to survive when two incomes become one

By Kate MCallum, Multiforte Financial Services

“Our priority is being smart with our money” said Chris, who recently received a redundancy. “That way I know the family will be okay, and I have flexibility to take a lesser paid role if I wish, or to have the time to wait for a great opportunity to come along.”

Maybe you have received a redundancy. Or one of you has stopped work to be a full-time parent. Perhaps you’ve decided to study full-time, or your partner has started his/her own business. Whatever the reason, the switch from two incomes to one can be challenging.

Here are some practical tips to help you survive without getting deep into debt.

1.    Acknowledge that things are different
This is the first thing you need to do.  Many people make the mistake of not quantifying the financial impact of one income, or think that the situation will be temporary. As a result, they don’t make the necessary changes and get deeper and deeper into debt.

2.    Clarify your income, expenses and cashflow
Whether or not the shift to one income was expected, you need to understand if you have enough income to survive. Start with your fixed expenses – these are the items that are non-negotiable like your mortgage or rent, utilities, insurance, food and medical expenses. It’s important to include not just day-to-day expenses, but also larger bills like car insurance or school fees. You’ll need to ensure that you are keeping surplus in your account to fund these when they become due.

Then calculate your discretionary expenses, like entertainment, pay-TV, weekends away. To help with this step, please ask us for our easy-to-use cashflow planner.

3.    Reduce unnecessary costs
If the income from the working partner falls short of your financial needs, you’ll have to tap into your savings and/or reduce your discretionary costs. You can achieve this in two ways: first, by reducing the number of discretionary items you buy; and secondly, by purchasing items on special or substituting cheaper alternatives.
If the reduction in your household income is likely to be longer-term, you may need to make greater changes. You may be able to trade your car. You could downsize your home, often your biggest living expense. You may explore the benefits of renting versus owning your principal residence.

4.    Identify the benefits
The potential upside to losing one income is that you may be able to reduce your taxes. You may also qualify for Centrelink benefits that were not available to you with two incomes.

5.    Remember your future
Moving to one income is also a move to one set of employer superannuation contributions —which can amount to significant dollars over time. Super contributions should be one of the last things that you cut. If your one income situation is longer term, then you need to keep your family’s long term savings growing. The working partner may wish to make spouse contributions – you could be eligible for a bonus tax-offset from the Government of up to $540.

6.    Protect your family’s lifestyle
It can be tempting to reduce your life insurance when money is tight, but it’s a short term gain that could cause a lot of long term pain.
If you have left a job, or had a redundancy, you also need to identify what insurance benefits you may be losing as a result. If there are continuation options on the insurance cover previously provided by your employer, it is worth assessing if there is benefit in taking up this option.

Regardless of whether you are working, you need certain types of insurance. Particularly if you have children, you need to consider how you would cope should something happen to the non-working partner. The other issue is insurability – if you cancel your insurances now, you may find it more difficult to obtain cover later on.

7.    Plan Ahead
If you are expecting to leave your job for any reason, or planning to move to one income, you have time on your side. Use it to your advantage. Try living on one income for several months to see what it takes—and save your second salary in that time into a “buffer” fund.
We recommend that, regardless of your financial position, you have around three to six months of living expenses set aside in a liquid, high interest-bearing cash account – so that should things go pear-shaped, you can maintain their lifestyle.

In your planning phase, you should also reduce or restructure your debt. This can also provide you with access to home equity, to be used in case of emergencies, and to provide peace of mind.
Many people wait until the event occurs and then react emotionally – not rationally. The single best decision you can make is to begin with logical financial planning – it will lower your anxiety and help you develop a higher level of confidence about the decisions you eventually make. Live well, sleep well.

IMPORTANT NOTICE: This information is current as at March 2010. This information is of a general nature only and is not intended as investment advice or a securities recommendation. It doesn't account for your investment objectives, particular needs or financial situation. These should be considered before making an investment decision and we recommend you consult a financial adviser. This information should not be considered as a comprehensive statement on any matter and should not be relied upon as such.  This information is given in good faith and has been derived from sources believed to be accurate. Multiforte nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility or liability arising in any other way including by reason of negligence for errors or omissions herein. This disclaimer is subject to the contrary provisions of the Trade Practices Act.